An energy crisis looms ahead for Pakistan. This time, again, it will be caused because of the shortage of Liquefied Natural Gas (LNG). For the third time consecutively, the government is forced to arrange supplies of liquefied natural gas (LNG) for winter months at the eleventh hour. Given the fact that the demand for LNG peaks during winters, the procurement of LNG at the last minute by the ruling party is questionable.
Pakistan started importing LNG in 2015. Pakistan formulated LNG import strategies on the assumption that it would be in abundance and cheap in the near future. This assumption has turned out to be flawed in 2021. This year, LNG prices have shot up at a blistering pace and are hitting record highs. The average price for a December LNG derivatives contract in Northeast Asia is about $17.65 per mmBtu, and around $17.80 per mmBtu for January. Last year’s December delivered price for physical cargoes was approximately $11.50 per mmBtu, and January’s cargoes averaged around $17 per mmBtu.
Pakistan’s reliance on LNG is growing at an exponential rate as domestic gas fields are being exhausted. Pakistan procures LNG through long-term contracts market and short-term spot markets. The LNG delivered long-term agreements have a fixed price, pegged to Brent crude oil prices. The LNG bought through long term agreements is used to meet the consistent or baseline demand. Spot markets witness price volatility and are typically used to meet yearly fluctuations in demand.
Countries hedge the risk of price volatility by placing orders for LNG cargoes earlier than usual. Pakistan has been ordering LNG, with a maximum of thirty days between the order being placed and the first delivery. A prominent example of this is the government’s advertisement for six cargoes to be delivered through December, in November. Government received offers of 15.8 dollars to 17 dollars, right at or slightly above the break-even point at which LNG’s economic viability compared to furnace oil is set-off. This has been the pattern for three years now.
3/3 Severe shortage of coal in China & India is not only driving the prices of Coal to its peaks but has also increased demand of LNG resulting in very high LNG prices. Pakistan will face very high prices of LNG gas & may result in power shortages as well during winters
— Musadaq Zulqarnain (@MusadaqZ) September 30, 2021
Expensive LNG implies expensive electricity, a rising subsidy bill for the ruling party as the government is firmly committed to providing LNG at subsidized rates to export-oriented businesses. The price hike can take a toll on foreign exchange reserves, increase public debt and inflation.
Natural gas price across the globe is touching new highs. Global markets are witnessing a spike in prices these days as large parts of northeast Asia are witnessing colder temperatures and the easing of lockdowns has further boosted demand across the world.
China and Japan – two of the biggest importers of LNG in East Asia – have depicted strong demand for natural gas as their economies rebound strongly after the pandemic. China and Japan have shipped in 18 million more tones of LNG in the first seven months of 2021 as compared to the same period in 2020. Japan increased its LNG imports to avoid a power crisis as a result of rising temperatures, while Chinese firms have been buying cargoes to meet peak demand in southern regions and to stockpile for winter.
In Europe, the situation remains uncertain. European natural gas prices have also risen significantly. The prices at the Dutch TTF hub shot up by a shocking 32% in the past month to a record high, further boosted by summer maintenance outages in Norway, low LNG supply, high carbon prices and low gas inventories. In comparison to its 80% storage last year, gas storage in Europe is currently about 50% to 60% of capacity.